Student finance - a major concern for anyone at university or choosing to study abroad. So just how big is the issue and what is the reality?
Debt is, or should be, at the front of the mind for all university students and their parents. Moving to university is a big transition that even the most financially savvy find difficult to navigate.
Indeed, quotes and scare stories appear almost weekly in the national press:
"In 2006 the average student left university owing £13,252, an increase of £612 on last year. For those students who are entering higher education in 2006 this figure is likely to be closer to £30,000."
NatWest Bank, August 2006
"Two thirds of 2003 graduates moved back in with their parents to save money and pay off their debt."
The National Union of Students, 2006
"It is alarming that so few of tomorrow’s graduates and their families really comprehend the financial implications of going to university… despite the publicity surrounding the introduction of top-up fees."
The Association of Investment Trust Companies, July 2006
(The below is adapted from Chapter 1 of The Student Finance Vigilante)
Let’s try something. Who has ever thought, “It is OK to spend a little extra now because I’ll be earning soon”? Hands right up, please.
It is a common assumption amongst many students. After all, even a starting wage of £18,000 sounds attractive when you are earning nothing. Ever day-dreamed about the years after university? What do you want to do? What are you looking forward to? By the age of 30, what do you think you will have in your life?..... A partner? Kids? Probably a home, right? Regular holidays, a nice car and to be settled into a good job paying a nice salary? Comfort and a good standard of living. Who knows what you are hoping for? It’s all your life, they are all your dreams.
But all these dreams require money. Perhaps not much – we are not suggesting that you have to go out all guns blazing to become mega rich! Some people just want to be comfortable. And that’s fine.
The simple fact is this. Let’s say you graduate when you are 22. Imagine you have a £17,000 debt, and you are paying £100 a month off your bank loan. Your student loan repayments are increasing with a generous salary increase every year, but: it will still take you until you are 29 to have paid it all off. Life, it seems, will begin at 29.
What? Rubbish, right? Well, let’s take a deep breath and spend some time on the complicated stuff before we move on to what to do about it in later chapters.
In our research we have looked at the spending habits of students and produced a model showing the potential income and spending patterns of both a Big Spender student and a Low Spender student during three years at university. The results were shocking.
They showed that a Big Spender, who does not try too hard to cut costs, who goes out quite a lot, and who regularly treats themselves, is likely to come out of university after three years with a debt of £28,159. This is an extremely scary figure, equivalent to a person’s salary before tax for an entire year in a well paid graduate job three years after university! But, of course, it is the Big Spender, so you have nothing to worry about. Right?
We looked at those who cut their costs back to the bone, who still went out, but spent less. The Low Spender student was one who walked instead of getting the bus, made sandwiches at home instead of always eating at the union, who avoided certain luxuries and lived smart. They still came out with a debt of £12,520.
However it is quite difficult to be cost cutting every minute of the day and it is more likely that a large number of students will leave university with a slightly higher debt, say £17,000.
The average student debt upon leaving university in 2005 was £12,640, according to NatWest. Barclays survey found it came to about £13,501. This is below our ‘low spending’ student outcome, but it is worth remembering that the ‘average’ encompasses a lot of students that get help from their parents. Our calculations for the low spending student are based on a student that only gets help with their tuition fees. We have tried to simulate a scenario with little parental help.
It is therefore difficult for anyone to look at an average figure and deduce, “that is what I am going to leave with.” Instead, we invite you to download our models from The Student Finance Vigilante (TSFV) website www.studentfinancevigilante.co.uk along with TSFV’s Money Tracker to enable you to do your own budgeting, and play with the figures to see where you may fall. (You can purchase this package now at www.studentfinancevigilante.co.uk. By entering the code SFVTOP, you will receive 20% off the Student Finance Vigilante)
Although we have already noted that it is difficult to assume anything from an ‘average’ figure, it can be useful as an assumption. Unfortunately, if you ask a different person, you get a different answer. NatWest surveyed graduates about their starting salaries in 2005 and found that the average was £14,090. The Association of Graduate Recruiters asked several hundred graduate recruiters in 2005 and found that the average starting salary was £20,783 in large corporations – but this varied between a low of £14,500 and a high of £28,500.
Let us imagine that you will start on something in between; say £18,000.
Of course, £18,000 is not how much you actually get. In one year, at 2004 rates, on an £18,000 salary, you will pay £2,680 in income tax, £1,459 in National Insurance and £720 as your mandatory student loan repayment. These all usually come out before you receive your pay cheque. In other words you only get 73% of your salary!
So, you are left with £13,141 a year. Your big bills would be rent (say, £3,500 a year, leaving you with £9,641), council tax (another £1,000 but it is increasing all the time, leaving you with £8,647). Then there is travel to your job, basic living costs such as food, your bills such as water, gas and electricity, insurance, pension, clothes for work… All in all, on a salary of £18,000 you will probably be left with a couple of hundred pounds to actually spend per month. If you owe anything over and above your student loan (and if you owe £17,000 you will probably owe someone other than the Student Loans Company £7,000 of that), you have to find money to pay it off out of the remaining amount.
It is also worth remembering that this does not account for the £10,000 of your student loan, which is also growing for every day you have not paid it all off. It may have taken you seven and a half years – or until you are over 29 – until you have paid the £7,000 off, but it may take you even longer to pay off your student loan. This is because on low salaries the amount you pay off is also low.
If you were to stick at a salary of £20,000 for the rest of your life, your mandatory student loan repayments will not reach beyond £900 a year, and it would take you until you are 35 to pay it all off at 3% interest. You could make other payments to speed it up, but on a £20,000 salary, it is unlikely that you would be able to afford to. Of course, most people have salaries rising over time – thankfully!
On the sort of timescales we are talking about here, for every few hundred pounds more you spend ‘just because’ whilst at university, it escalates with interest over many, many years and suddenly that television you bought becomes a lot more expensive. £200 spent can easily become £300 in the long run, when accumulated with other debt and paid off over the years.
We noted interest can be your friend, and we meant it. High interest rates and compound interest can make any money you save breed faster than student house termites, but that is probably some time away for the moment!
The above passage has been adapted from chapter one of ‘The Student Finance Vigilante'. By ordering the book now at www.studentfinancevigilante.co.uk and entering the promotional code SFVTOP you will save 20%.
The Student Finance Vigilante has been set up to tackle the massive problem of debt that is facing students at university today; an increasing problem that will haunt many for a decade after university.
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